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Does Central Bank Transparency Reduce Interest Rates?

  • Eijffinger, Sylvester C W
  • Geraats, Petra M
  • van der Cruijsen, Carin A B

Central banks have become increasingly transparent during the last decade. One of the main benefits of transparency predicted by theoretical models is that it enhances the credibility, reputation, and flexibility of monetary policy, which suggests that increased transparency should result in lower nominal interest rates. This paper exploits a detailed transparency data set to investigate this relationship for eight major central banks. It appears that for all central banks, the level of interest rates is affected by the degree of central bank transparency. In particular, the majority of the improvements in transparency are associated with significant effects on interest rates, controlling for economic conditions. In most of these cases, interest rates are lower, often by around 50 basis points, although in some instances transparency appears to have had a detrimental effect on interest rates.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5526.

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Date of creation: Mar 2006
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Handle: RePEc:cpr:ceprdp:5526
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  1. Geraats, Petra M, 2000. "Why Adopt Transparency? The Publication of Central Bank Forecasts," CEPR Discussion Papers 2582, C.E.P.R. Discussion Papers.
  2. Andrew G Haldane & Vicky Read, 2000. "Monetary policy surprises and the yield curve," Bank of England working papers 106, Bank of England.
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  4. Muller, P. & M. Zelmer, 1999. "Greater Transparency in Monetary Policy: Impact on Financial Markets," Technical Reports 86, Bank of Canada.
  5. Rachel Reeves & Michael Sawicki, 2005. "Do financial markets react to Bank of England communication?," Discussion Papers 15, Monetary Policy Committee Unit, Bank of England.
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  7. Siklos, Pierre L., 2000. "Monetary policy transparency, public commentary, and market perceptions about monetary policy in Canada," Discussion Paper Series 1: Economic Studies 2000,08, Deutsche Bundesbank, Research Centre.
  8. Eijffinger, Sylvester C W & Geraats, Petra M, 2002. "How Transparent are Central Banks?," CEPR Discussion Papers 3188, C.E.P.R. Discussion Papers.
  9. Courtenay, Roger & Clare, Andrew, 2001. "What can we learn about monetary policy transparency from financial market data?," Discussion Paper Series 1: Economic Studies 2001,06, Deutsche Bundesbank, Research Centre.
  10. Cukierman, A., 2000. "Accountability, Credibility, Transparency and Stabilization Policy in the Eurosystem," Papers 2000-4, Tel Aviv.
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  12. Jensen, Henrik, 2001. "Optimal degrees of transparency in monetary policymaking," Discussion Paper Series 1: Economic Studies 2001,04, Deutsche Bundesbank, Research Centre.
  13. William Poole & Robert H. Rasche, 2003. "The impact of changes in FOMC disclosure practices on the transparency of monetary policy: are markets and the FOMC better "synched"?," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 1-10.
  14. Petra Gerlach-Kristen, 2004. "Is the MPC's Voting Record Informative about Future UK Monetary Policy?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 106(2), pages 299-313, 06.
  15. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
  16. Jonathan Coppel & Ellis Connolly, 2003. "What Do Financial Market Data Tell Us about Monetary Policy Transparency?," RBA Research Discussion Papers rdp2003-05, Reserve Bank of Australia.
  17. Hendry, David F., 1995. "Dynamic Econometrics," OUP Catalogue, Oxford University Press, number 9780198283164, March.
  18. Matthew Rafferty & Marc Tomljanovich, 2002. "Central bank transparency and market efficiency: An econometric analysis," Journal of Economics and Finance, Springer, vol. 26(2), pages 150-161, June.
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